In Which Elon Musk Once Again Becomes a Classroom Hypothetical

This time, it’s Brazil.

If you’re not following the saga, the story is apparently that ex-Twitter, now controlled by Elon Musk (not the CEO, though; you can’t even really say he’s the owner without qualifying about the interests of other investors and – don’t forget – the debtholders), ignored the order of Brazilian Supreme Court Justice Alexandre de Moraes to remove certain accounts associated with hate speech and misinformation.  Apparently out of fear that Twitter’s Brazilian employees would be arrested, Twitter shut down its Brazilian offices.  At that point, Twitter was out of compliance with a Brazilian requirement that a legal representative be present in the country.  So, Justice de Moraes ordered that access to Twitter be blocked throughout Brazil.  (Legal challenges to that order continue)

That’s not great for Twitter, but it turns out, it was even worse for Starlink, a wholly-owned subsidiary of Musk-controlled SpaceX, because the Justice ordered that Starlink’s financial accounts be frozen in order to force payment of fines owed by Twitter.  Musk at first insisted that he would not block access to Twitter via Brazilian Starlink, then – on that point – relented.  Shortly thereafter, it was reported SpaceX was evacuating its personnel from the country.  As the Wall Street Journal put it, “Starlink’s entanglement in a dispute originally about X is a stark illustration of how some government officials around the world may draw few distinctions between enterprises that Musk runs.”

So, all of this has the makings of a great introductory classroom discussion of corporate separateness, enterprise liability, and veil-piercing.  I have no idea what the law on this is in Brazil, but let’s talk about how we’d analyze this under American law.

(more under the jump)

Ordinarily, a key virtue of the corporate form is that it is considered its own legal entity, and its assets only belong to the corporation itself.  They are not available to its stockholders, or its officers; they are owned solely by the corporation.  That means creditors have some reassurance that the corporation’s pool of assets will remain with the corporation and will be available to pay debts.

Based on that simple maxim, then, it would be improper to freeze the assets of Starlink – a completely separate company from Twitter – to make good on Twitter’s debts. 

But!  Under U.S. law, there is a concept of “enterprise liability.”  Sometimes two corporations are managed in such a way that there is no practical distinction between them.  The classic example, used in just about every introductory business organizations class, is Walkovszky v. Carlton, where several taxi corporations were run in tandem.  Each corporation owned only two taxis, but they had the same couple of shareholders, and they commingled all their resources.  Which is to say, they had a single garage, a single set of drivers and mechanics and financiers and presumably dispatchers, and there were no observed formalities regarding their separate operations.  They were managed in all practical respects like one big taxi company.  But they had been legally divided into several companies, presumably so that the creditor of any one company would not be able to reach the assets of the other companies.

In such situations, some courts have held, the owners and operators of the companies have not respected the corporate separateness of the entities, and therefore, the law should not either.  We can treat them as one big corporation, with all of the assets across all companies available to pay creditors.  In general, courts look to such factors as overlapping shareholders, officers, and directors, physical space/assets, employees, a lack of documentation of the separate nature of the different businesses, and whether the two corporations were managed as though they were part of a single venture.  The test is very difficult to meet, and often seems to produce inequitable results.  See, e.g., Supreme Court of Pennsylvania Recognizes “Enterprise Liability” Theory as Valid Means of Piercing the Corporate Veil; Carliss Chatman, Corporate Family Matters.

One surprising modern day example is described in this article about the Catholic church and sex abuses cases, and legal disputes about church assets – which may be distributed among parishes, dioceses, held in trust by bishops, etc – available to pay judgments to the victims.  (For a scholarly analysis of the Catholic church problem, see Stephen Bainbridge and Aaron Cole, The Bishop’s Alter Ego).  There is also this article about nursing home owners who separately operate real estate companies, staffing companies, pharmaceutical companies, and so forth, so that all the substantive operations of the nursing home are provided by contractors, and any excess nursing home profits go out the door to pay those other companies.  Leaving the nursing home unable to pay judgments for substandard care.

How does that precedent apply here?

Well, you could say there was some degree of informal commingling of Twitter and Starlink – or at least SpaceX – assets.  It’s well known that Musk reallocates engineers – not to mention data and microchips – across his companies, and though Tesla SEC filings say this is all done with proper formalities, Chancellor McCormick’s findings in Tornetta v. Musk suggest otherwise. 

And if Starlink is the only internet provider that refuses to honor the order to block Twitter – well, that just adds to the evidence that the two are run in tandem.

That said, the line-blurring here does not (as far as I can tell) appear to be anywhere near the level you’d ordinarily expect for a court to find an actual lack of corporate separateness.  And it certainly helps matters for Starlink that Musk backed down and eventually agreed to block Twitter.

Which means, at least under American law, it’s unlikely a court would find matters got so bad that the two would not be considered separate companies.

But there’s another possibility – veil piercing (and/or reverse veil piercing).  What if we don’t think of Starlink and Twitter as one big company?  What if we think of them both as, essentially, the personal assets of Elon Musk?

This is a similar, but separate, concept from enterprise liability.  Enterprise liability looks horizontally across two corporations.  Veil piercing looks to whether the shareholders of a particular corporation have so ignored the corporation’s legal existence that it’s only fair the courts do, too – and essentially treat the corporation, and its shareholders, as one and the same.  Once again, we’d look to whether the shareholders ignored all corporate formalities, and made no distinction between the corporation’s assets and their own assets, usually withdrawing and adding at will, and maybe making free use of the corporation’s resources for personal purposes.  In that case, we might ignore the corporation’s separateness and look to the shareholder to satisfy the corporate debts.  Sometimes – and this is where reverse veil-piercing comes in – we’d look to the corporation’s assets to satisfy the shareholder’s personal debts.

In this case, then, we’d say something like: Twitter is Elon Musk’s plaything; therefore Twitter’s debts are Elon Musk’s debts (veil piercing).  We’d seize Elon Musk’s personal assets in Brazil if they were here, but they’re not.  What is here is Starlink/SpaceX.  And Musk is so intertwined with SpaceX that we can treat SpaceX assets as Musk assets, and freeze those (reverse veil-piercing).

Does that work?  Again, at least on the surface, not under American law, because whatever else Musk is doing, it seems unlikely that he’s ignoring formal distinctions between his own assets and the assets of Twitter and SpaceX.

Not to mention, Musk does not own, uniquely, Twitter and SpaceX.  Both companies have their own outside investors (and presumably different outside investors, at least to some degree - SpaceX has employee-shareholders, for example).  That fact is exactly why veil piercing and reverse veil piercing especially is rare outside the context of businesses with a single shareholder; outside shareholders of SpaceX might legitimately object to the notion that SpaceX assets are Musk assets – they think they have a claim on those assets, too! 

So, again, if we’re talking only about American law, it doesn’t look like the Brazilian orders against SpaceX/Starlink would hold up.

That said, there’s another angle here.  There are currently at least three lawsuits pending against Tesla that argue, in one form or another, that Elon Musk violated his fiduciary duties to Tesla by reallocating resources to his other companies.  These cases were filed just before Tesla reincorporated to Texas, so they’re in Delaware under Delaware law.  And, presumably, once the leadership structure gets settled (there’s a pending motion to combine them), and they’re litigated further, at least one argument the plaintiffs can now offer is that Musk’s obvious hand in running his companies in tandem – how he overrides the formal CEO (Twitter), reallocates resources (Tesla, xAI, Twitter, SpaceX) at will – all sets Tesla up for these kinds of problems, exactly as the Wall Street Journal reported (“Starlink’s entanglement in a dispute originally about X is a stark illustration of how some government officials around the world may draw few distinctions between enterprises that Musk runs.”).  And that, too, is evidence that Tesla’s board has not exercised oversight of Musk.